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Building a home from scratch allows you to custom-tailor every detail to your liking — but it can be quite expensive. , construction costs can range from nearly $140,000 to well over $500,000 in the U.S.
To fund this massive undertaking, consider taking out a USDA construction loan. These one-time close loans can help you streamline your financing process and save money on closing costs, provided your home is built in a rural area designated by the U.S. Department of Agriculture (USDA).
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A USDA construction loan, also known as a USDA construction-to-permanent loan, is a type of one-time close mortgage insured by the U.S. Department of Agriculture. It’s different from a traditional USDA loan in that it helps you buy land, pay for construction, and take on a mortgage for the newly constructed home all with one loan. This means you won’t need separate loans for the construction and the property itself.
However, USDA construction loans can be pretty hard to find. To be eligible, you’ll also have to meet stringent borrower and property requirements.
When you build a home from scratch, sometimes you have to take out two separate loans: one to pay for the construction and another to finance the house (like a traditional mortgage). USDA construction loans simplify this process by wrapping all financing into one home loan, which means you’ll only have one set of closing costs before construction begins.
USDA construction loan funds are typically disbursed in stages as your home’s construction progresses. Once the home is built, the loan will transition from a construction loan into a standard 30-year fixed-rate USDA loan, and you’ll start making regular mortgage payments.
Borrowers can use the funds from a USDA construction loan to cover the cost of building single-family homes, including eligible manufactured homes and condos. These expenses can include:
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USDA construction loans are designed to help potential homeowners build properties in rural areas, which means they aren’t available to everyone. To qualify for a USDA one-time close construction loan, you must meet the following eligibility requirements:
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USDA construction loans don’t have a set minimum credit score, but most lenders like to see a score of at least 640.
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Your debt-to-income ratio (DTI) must be less than or equal to 41%.
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Your total income cannot exceed the USDA’s income limit requirements. These limits will vary depending on your household income and where you live, but in most counties, one- to four-member households must earn below $112,450 a year to qualify.
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You can’t use USDA construction loans to build vacation homes or investment properties. Only primary residences are eligible.
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The property you build has to be in a USDA-approved area — typically a rural or suburban part of town. Use this to see if the location where you want to build your home is in an eligible area.
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You must work with a contractor approved by the USDA.
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The home meets the current codes for thermal standards.
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The builder must give you a new construction warranty.
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As with all financing options, USDA construction loans come with perks and downsides. Make sure you’re fully aware of both before making any decisions.
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Offer fixed interest rates, meaning your monthly payments will stay consistent during the construction period, then again throughout the 30-year mortgage
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Allows you to take out one single loan for the land, construction, and completed house
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You’ll only have to pay closing costs once
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No down payment required
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USDA construction loans can be difficult to find, so you’ll have fewer lenders to choose from
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These loans have strict borrower and property eligibility requirements
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Your contractor or builder must meet USDA requirements
First, you’ll need to hire a USDA-approved contractor to build your home. Some of the USDA’s contractor requirements include having at least two years of experience building single-family homes, holding a construction or contractor license, and being able to provide proof of a minimum of $500,000 in commercial liability insurance.
Once you’ve found an eligible contractor, the next step is to find a USDA-approved lender to work with. Unfortunately, there aren’t many participating lenders to choose from, so it might be challenging to find one in your area.
The last step in the approval process is to submit your loan application to a USDA-approved lender. Be prepared to provide information such as an estimate of your monthly income and debts, proof of employment, and tax returns. Mortgage lenders will also check your credit score to gauge your borrowing risk. Some lenders may allow you to complete this process online.
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A USDA one-time construction loan can be a solid financing method if you’re looking to build a home in the rural part of town. But if you don’t think you’ll meet its eligibility requirements, consider these alternatives instead.
A FHA one-time close construction loan is insured by the Federal Housing Administration and caters to borrowers with less-than-perfect credit scores. It works like a construction loan at first, but once your home is built, it transitions into a permanent FHA mortgage. As long as you can make a 10% down payment, you could qualify for an FHA construction loan with a credit score as low as 500. If your credit score is at least 580, you’ll only need to put 3.5% down.
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VA one-time close construction loans are insured by the U.S. Department of Veterans Affairs and are designed to help veterans, active service members, and other eligible military associates become homeowners. Like USDA construction loans, VA one-time close construction loans provide up to 100% financing, which means no down payment is required.
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Unlike FHA and VA construction loans, conventional one-time close construction loans aren’t insured by government agencies. Most lenders require a minimum credit score of 700 and a 5% down payment.
Another option is to take out a land loan and/or construction loan for the cost of building the home and then combine that with a standard USDA loan. Even though this method will require two closing dates, it’s typically easier to find lenders that offer land loans, construction loans, and USDA loans than those that offer USDA construction loans.
It can be difficult to get a USDA construction loan because of the many strict income limits and property requirements. And since not many lenders offer these types of loans, finding the one that fits your needs can be quite tricky.
The interest rate for a USDA construction loan in 2024 can vary since USDA-approved lenders set their own interest rates and terms. To make sure you’re getting the best deal, shop with a few different lenders to find the most affordable rate.
No. USDA construction loans aren’t the only option for building a home in a rural area. If you don’t meet the USDA construction loan’s eligibility requirements, consider other financing methods like a conventional or FHA one-time close construction loan.
This article was edited by .